Capacity Expansion Games with Application to Competition in Power Generation Investments

René Aïd, Liangchen Li and Michael Ludkovski
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René Aïd: LEDa - Laboratoire d'Economie de Dauphine - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres
Liangchen Li: UC Santa Barbara - University of California [Santa Barbara] - UC - University of California
Michael Ludkovski: UC Santa Barbara - University of California [Santa Barbara] - UC - University of California

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Abstract: We consider competitive capacity investment for a duopoly of two distinct producers. The producers are exposed to stochastically fluctuating costs and interact through aggregate supply. Capacity expansion is irreversible and modeled in terms of timing strategies characterized through threshold rules. Because the impact of changing costs on the producers is asymmetric, we are led to a nonzero-sum timing game describing the transitions among the discrete investment stages. Working in a continuous-time diffusion framework, we characterize and analyze the resulting Nash equilibrium and game values. Our analysis quantifies the dynamic competition effects and yields insight into dynamic preemption and over-investment in a general asymmetric setting. A case-study considering the impact of fluctuating emission costs on power producers investing in nuclear and coal-fired plants is also presented.

Keywords: Capacity expansion; Continuous-time games of timing; Non-zero-sum stopping games; Power generation investments (search for similar items in EconPapers)
Date: 2017-11
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Citations: View citations in EconPapers (4)

Published in Journal of Economic Dynamics & Control, 2017, 84, ⟨10.1016/j.jedc.2017.08.002⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02313872

DOI: 10.1016/j.jedc.2017.08.002

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